by Brandon Reiter
On August 16, 2022, The Inflation Reduction Act of 2022 (IRA) was signed into law. The IRA was created to direct new federal spending toward reducing carbon emissions, lowering healthcare costs, funding the Internal Revenue Service, and improving taxpayer compliance, all in an effort to help curb the rising inflation.
However, the House GOP is sending a message by passing a partisan bill yesterday (that WON’T make it through the Senate) that would cut that IRS funding.
So, what does this all mean?
Why is inflation so high? What is the purpose of the new IRS funding from the IRA? What message is the GOP sending by passing this bill?
Why Inflation is High
Inflation is reaching historically high levels due in large part to lingering effects from the pandemic. At the start of the Covid-19 outbreak, consumers began spending less because of lockdowns, and in turn, started saving more. Then, when Covid-19 restrictions eased, people started spending more again. Companies, however, couldn’t keep up with this increased consumer demand.
Just as there are many causes of broad-based inflation, there are many factors that have given way to higher energy prices. Large in part, due to Russia’s invasion of Ukraine and the resulting Western countries’ sanctions which put severe limits on the import of Russian oil. Both events played a significant role in rising energy prices and supply-chain issues.
The result of all these things? Higher prices for most goods and services.
Corporations and wealthy individuals have been getting away with not paying taxes. Ergo, most people can’t afford to buy things while those who can do not fund the government with their taxes, which is contributing to inflation and leaving the economy in a very shaky state.
IRA Funding From The IRS
Excerpts from the nonpartisan Joint Committee on Taxation (JCT) indicated that the legislation might lead to increased payments on personal taxes for Americans of all incomes. However, this calculation was based on an assumption that companies would pass on parts of the minimum corporate tax to employees, which was criticized by Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center (TPC). The TPC estimated that the bottom 80% tax filers by income would actually receive a net benefit. The 80th-99th percentile would incur a small cost (0-0.1% increase in average federal tax rate) while the top 1% would incur a 0.2% increase. The costs mainly are imposed indirectly as corporations facing higher taxes, which may end up reducing the wage increases for workers; individual tax rates were not changed.
Treasury Secretary Janet Yellen directed IRS Commissioner Charles Rettig to NOT use the new funding to increase the rate of audits of those making less than $400,000 a year above historical levels, but to instead focus on “high-end noncompliance.”
The GOP Response
“Our first bill will repeal funding for 87,000 new IRS agents, because the government should be here to help you, not go after you,” declared the very newl House Speaker Kevin McCarthy, who was barely able to get elected by his own party.
Republicans claimed throughout the midterm campaign that Democrats were sending “an army of IRS agents” to go after middle and lower-class taxpayers with the new agency funding in the IRA. A tad misleading.
Republicans also say they are not buying the assertions from administration officials stated above and have vowed to keep up scrutiny of the IRS.
The Democrat Response to the GOP Response
“They don’t want a fairer tax administration, they think it’s bad for some of their supporters,” Rep Richard Neal, the top Democrat on the Ways and Means Committee, said in debate with Republicans. “What they’re attempting to do tonight is bad for middle-class families. It’s bad for small businesses.”
This new House Republican measure would increase the budget deficit by more than $114 billion through 2032, according to the Congressional Budget Office.
My Interpretation
Inflation is high. Corporations haven’t been paying the limited taxes they owe. Lawmakers are trying to curb rising inflation by funding various programs, including the IRS so that it can collect from the top 1% more efficiently. The GOP is trying to appeal to their supporters and say that Democrats are spending money and use it to come after poor people to force them to pay more taxes with guns. The Democrats are saying, “false”.
Will any of this actually reduce inflation? We’ll just have to wait and see.
Speaking of tax… If you need help getting your businesses’ 2022 financial statements ready you should hire an outsourced CFO or bookkeeper from Skyview! For more info email me at brandon@skyviewcfo.com!
